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Chapter 5: Q. 4 (page 129)
Why is the supply curve with constant unitary elasticity a straight line?
Because price and quantity increase proportionally.
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If demand is inelastic, will shifts in supply have a larger effect on equilibrium price or on quantity?
Suppose you are in charge of sales at a pharmaceutical company, and your firm has a new drug that causes bald men to grow hair. Assume that the company wants to earn as much revenue as possible from this drug. If the elasticity of demand for your company鈥檚 product at the current price is , would you advise the company to raise the price, lower the price, or to keep the price the same? What if the elasticity were ? What if it were ? Explain your answer.
The federal government decides to require that automobile manufacturers install new anti-pollution equipment that costs per car. Under what conditions can carmakers pass almost all of this cost along to car buyers? Under what conditions can carmakers pass very little of this cost along to car buyers?
Can you think of an industry (or product) with
near infinite elasticity of supply in the short term? That
is, what is an industry that could increase Qs almost
without limit in response to an increase in the price?
Economists define normal goods as having a
positive income elasticity. We can divide normal goods
into two types: Those whose income elasticity is less
than one and those whose income elasticity is greater
than one. Think about products that would fall into each
category. Can you come up with a name for each
category?
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